Laurea University of Applied Sciences

Leppävaara

Lean management and cost control

Jere Mikael Petäjistö (1501320)

March, 2018
Table of Contents

1 Introduction.......................................................................................3
2 Lean management...............................................................................3
3 Cost control.......................................................................................3
References................................................................................................ 5

1
2 Introduction

In modern times companies have complex environment and even more complex systems. More
are being constantly being developed to find out the best and most optimal ways. Consults
are being called and management analyzes and investigates actions to plan being more
effective and make more profit to please stakeholders. As environment changes rapidly and
costs and resources required, it is advised to mitigate and lessen the impact of unexpected
and unnecessary costs. It is no new concept to conserve and optimize action, but only quite
recently it was named as a concept. Lean management is rising and current trend that was
named by Toyota when they investigated their process and optimized to be as efficient as
possible.
As mentioned of costs, cost management is wide concept to keep track and deal with costs
and plan and manage them in general. We will focus on cost control in this report, we will see
the definition and width, there is an example to grasp easily of the concept. After second
chapter of defining Lean management and third chapter of Cost control, we will see the
similarities they share in fourth chapter. Conclusion is in the fifth chapter, discussing and
summarizing the report. The aim for this report is to provide understanding of the definitions
and similarities of lean management and cost control and their differences.

3 Lean management

The purpose of Lean management is to eliminate all unnecessary functions and processes.
Anything that does not bring more value is removed or preferably changed to be simpler to
ensure efficiency. The defining thought is utilizing resources and time as efficiently as
possible, this includes seeing every single process as independent system that will be
simplified to be easy to understand and therefore create more value. The main point of lean
is in the end the customer, everything that is done via lean techniques aim to create value for
customer using less time and resources. Avoiding creation of waste is integral point of lean,
anything that does not add any value to product is eliminated. Lean is heavy focus on the
process-oriented way of thinking and rather than correcting in the end once product is made,
lean thinking asks question on regular basis when making a product to ensure through
repetitive questions and models to find out what is efficient and what is not.

Lean is often associated with manufacturing and factory environments, which is only
manifestation of lean. Lean itself is a way of thinking, an ever-going process and analyzation
of processes and shifting with the world and be in perfect control and understanding of
actions. This is also different from traditional standpoint of optimizing, instead of vertical
flow from management to lower levels and optimizing individual systems and purchasing new
ones and utilizing their independent potential, lean thinking focuses on horizontal view on
the big picture and the mutual connection and flow of the process of providing a service for
example. Rather than supervising each and individual system and attaining new ones that are
seen as good, lean way focuses on seeing how they function in together as a flow. This
eliminates excess waste and resources compared to the traditional method of overseeing
vertically. This is not absolute, however. Lean is flawed concept after

Lean has disadvantages as well, according (businessknowledgesource, 2018), lean requires the
full support of everyone in operations, suppliers included. As lean aims to be as efficient, it
will not hold overly large inventory either, which makes it vulnerable to supplier problems.
Also requiring the full support, lean does not take into account external factors affecting the
process but not directly in the process, such as employee strikes.

Lean is by no means a new concept, as previously mentioned, being a way of thinking and
operating, it has been present always. Name was invented from article by John Krafcik in
1988 (Kanbachi.com), based on his master thesis he wrote while being quality engineer in
Toyota.
Toyota is great example of excellent management by lean, they have been operating debt-
free from year 1978 onwards (Huntzinger 2006, 53) and their financial systems support their
every point of action, including operational level and financial management. Many have tried
to copy method of Toyota, but none have succeeded. (Huntzinger 2006) states that Toyota’s
debt-free operation is possible due to successful lean management and great general
management and heavy focus on execution of implementations. Toyota has also set long-term
values early on when it was established and they drive long-term philosophy strongly and this
is reflected as organization growing and sustaining itself unlike any other organization of
companies. It has resulted in steady and well off profit every year and steady growth of
Toyota.

Toyota also demonstrates excellent integrity of people’s common agreement of the vision
how process should be and how the best possible one looks like. This trait, good discipline as
mentioned by (Huntzinger 2006, 57) is a result of the whole organizational culture which is
maintained and upheld constantly via supervisors and agreed upon employees. This fulfills the
requirement of lean where participation of everyone is necessity, otherwise lean
management will not be effective.

Compared to traditional management and result oriented view, results and estimations are
created from accounting calculations or previous results and calculating new target to reach.
This most often leads to negative end-of-month feedback, lessening the positive spirit in
organization as results are not reached consistently. This is where difference of lean thinking
can be seen very clearly as well, instead of understanding profit and reaching good results
being result of succeeding the right time and way. Lean thinking sees results as a result of
perfected and throughout execution of process that compliments the system itself, being
completely in-sync (Huntzinger 2006, 57-58). As another example, Huntzinger states that
football analogy is easy to state to understand the ground thought of difference between
traditional results oriented management and management by means of lean which focuses on
the process. Traditional management would be a coach leading a team and making strategies
and reacting from looking the scoreboard and switching players with steady intervals. Lean
manager loos at players and analyzes them and switches them as he sees fit in the moment,
maintaining the capacity of operation in steady level appropriate for each player. Having
made sure the performance was steady and appropriate, results are often better when design
of the game and actions were based on capabilities of players.

4 Cost control

Cost management refers to procedures before cost has taken place, estimation, planning and
budgeting them. Cost control is the procedures and actions after these steps and establish
actions to lessen costs. It is easy to present with four steps to help understand cost control
according website called (Accountingtools, 2018:)

The first step: Creating average value

This means gathering previous data from previous results, their growth and information.
Additionally, theoretical calculations that are achievable are to be taken and combining these
to create an average value where data will be compared. To say, a budget in a way.

The second step: Calculating variance

Second step refers to analyzation of the average value and the actual results; results are
compared to “optimal” and analyzed to see how company performed. There is heavy
emphasis on detecting anomalies and bad performance, such as unexpectedly high cost. If
these are not material, consideration on whether it is worth to analyze further is
recommended.

The third step: Analyzation of variances

Third step is in-depth analyzation of variance in costs of results. They are analyzed all the
way into the roots and determining the reason for the costs.

The fourth step: Practical measures

Based on results of analysis; conclude actions and measures to prevent further cost variances.
However, as it can be interpreted from first step, this method only works if there is a budget
to follow. If there is no budget, same method can be applied to following income statement
and analyzing unusual parts individually to find out the reason for heightened cost. Also this
example is only one aspect of cost control put into practice.
Cost control is method of approaching causes with analytical view, handling and
understanding the causes and circumstances of incurred costs and then changing ways or
adjusting to prevent further costs.

Cost control is implemented by the management, especially stressing the control part. As
mentioned already, establishing budgets is the first step onto cost controlling, the first way to
take factors into account and evade biggest and most obvious costs.
Cost cutting is especially effective method of controlling costs and gaining advantage,
however, (referenceforbusiness 2018) shares an real-life example how abusing the method
and using it only one-dimensionally could cause or stall business quite a bit. Albert J. Dunlap
was a former CEO of Sunbeam Corporation. He applied cost-cutting principle in many
occasions and his actions were often based on that. This way he achieved efficient cost
reductions, but failed to use that opportunity for gaining competitive advantage. He was fired
by the board of Sunbeam Corporation due to one-sided approach to every decision. Another
downside of abusing the way of operating will change corporation culture, and (Roger J,
2018) mentions that cost-cutting too much might lead to company letting go of too many
experienced employees who are quite of an asset to company. Recruitment is expensive and
consumes a lot of time, this should be kept in mind when laying off personnel to achieve
better results, too hasty and ambitious intentions might lead to long-term losses.

(Investopedia 2018) shares an example of cost control in their website, personnel payroll is
often outsourced. Reason for this is constantly changing laws concerning on calculations and
employee turnover. Taxes have to be constantly monitored and they are supervised. Often in
these cases, it is cheaper to outsource the whole process and this way conserve employee’s
work time and use that to something else. Same reason is also in outsourcing cleaning and
maintenance of property of the company, instead of hiring a cleaner or person responsible of
maintenance, company calculates which yields better result and less costs and quite often
less costs option is chosen.
In his article, Robert Half (2015) gathered five points for companies to consider of areas
where cost reduction can be taken. First point and factor to consider in order to be successful
is to get everyone included, including suppliers and immediate partners and terms of
contracts, such as better payment terms. Second point is environment related and waste
management, such as lessening electricity costs and optimizing heating system. In similar
area, third point encourages to utilize office space, cutting down rental costs and
unnecessary storages company may have. Fourth point he states is reaching to professionals,
hiring and working with consults is excellent for getting ideas and refining actions to conserve
resources and get better results with lesser efforts. His last point in his article encourages to
keep financial and accounting department up to date and constantly improving themselves
and keeping in touch with reality to be more well-prepared in harder times.

5 Similarities with lean management and cost control

As we can see, lean and cost control share quite a few similarities among each other. They
both aim to remove waste (non-value increasing action). Both aim to increase performance to
as optimal as possible to ensure best profit and save time and resources. While lean drives on
performance and process most importantly being fluid and as straight forward as possible,
thus saving time and resources, cost control aims to improve profit and find out the variance.
Variance could be “waste” in lean management and analyzing and eliminating the cause of it
is the center of action. Cost control finds place from the budget and the best theoretical and
realistic expected profit and then focusing on variance. Slightly aftermath compared to lean.
When we look at the goals of lean, they seem to reflect a lot of goals of cost control.
Analyzing a process with lean questions of value, could we achieve cost savings? As seeing the
very description of lean, this would seem possible as lean aims to rid all waste, including
unnecessary costs. Are they the same thing? Not exactly, while they are close and aim for
similar goals, they are slightly different. Cost control is not as process oriented as lean
management but operates in similar area.

It is possible to reach cost control and savings with lean management, as stated before, lean
management aims to remove non-value adding actions from the process and be as effective
with resources as possible. This includes money and controlling costs as well. As mentioned
before, that does not mean lean and cost control are the same thing. We can see that lean
management overlaps or more precisely said, manages what cost control aims as well. Easier
said, we can accomplish cost control with lean management principles.
Lean considers cost management to be an aspect of the system as a whole rather than
external aspect. Costs are not managed as independently in the process, but seen as result
when process is thought via MBM (management by means) and good example of this would be
that rather than hiring all the “best” experts and employees, lean utilizes and molds the
current system to be effective and integral, resulting in seamless teamwork and stable results
that can be seen objectively and improved and analyzed with relative ease.

6 Conclusion
Lean management is modern trend that focuses on integrity and simplicity in changing
environment of chaotic nature. Instead of attaining the “best” assets, lean integrates and
optimizes system as a whole to unlock the full potential. Creating base in mutual
understanding and motivation, requiring everyone’s support to succeed, lean is effective way
to operate a company. Focusing on means and process over results, lean is different and
approaches business from different standpoint, seeing result as reflection of good process
creating value. Evaluating each process of the process as a whole ensures the efficiency and
finds better alternative to create more value than less efficient, more “wasteful” process.
Cost control is analytical approach as well, calculating the base and average value that could
be reached via calculations based on previous performance and the best realistic theoretical
goal. After the actual action has taken place, results are compared to estimated and previous
results and unusual and high costs are then investigated to understand why it has incurred
and then plan measures to lessen and remove the source of cost to maximize profit. There
are quite a few similarities among cost control and lean management, and as said before in
fourth chapter, cost control can be achieved by managing operations with lean principles as
cost control aims on exactly the same goal as lean, but doing things lean leads to operation
being controlled in costs.
References

Lean Enterprise Institute. 2018. What is Lean? Referenced 28.3.2018.

https://www.lean.org/WhatsLean/

Kanbachi Blog. 2018. Lean Management. Referenced 28.3.2018.

https://www.kanbanchi.com/lean-management

Cleopatra Enterprise. 2016. What is the difference between cost control and cost
management? Referenced 28.3.2018.
http://www.costmanagement.eu/blog-article/what-is-the-difference-between-cost-control-
and-cost-management

Steven, Bragg. 2018. Cost Control. Referenced 28.3.2018.

https://www.accountingtools.com/articles/cost-control-definition-and-usage.html

Abinader, R.J. 2018. Cost Control. Referenced 28.3.2018.

http://www.referenceforbusiness.com/encyclopedia/Cos-Des/Cost-Control.html

BusinessKnowledgeSource.com. 2018. Lean manufacturing techniques pros and cons.

Referenced 28.3.2018.
http://www.businessknowledgesource.com/manufacturing/lean_manufacturing_techniques_p
ros_and_cons_025561.html

Half, Robert. 2015. Cost Control: 5 Strategies to Consider. Referenced 28.3.2018.

https://www.roberthalf.com/blog/management-tips/cost-control-5-strategies-to-consider

Huntzinger, J. R. 2007. Lean Cost Management. J. Ross Pub.